So why have cancelations risen so much in the last few months?  This has to do with Fannie Mae, Freddie Mac, Bank of America, Wells Fargo, Citi, and JP Morgan.  All these lenders went on a foreclosure “holiday” that by their own admissions, ended on January 3^rd.  So that in itself would account for many of the auctions recently canceled.  A few of you sent this over from the L.A. County Treasure and Tax Collector:

Source:  L.A. County Treasure

Now part of this may come from the foreclosure holiday but why cancel February?  It probably has to do with HAMP and also something with Fannie Mae and Freddie Mac now having unlimited support.  Also, HAMP offered extensions for many loans to January 31^st:

“(BusinessWeek) Mortgage servicers must give U.S. homeowners more time before kicking them out of the government’s loan-modification program, reflecting further struggles in the execution of the plan.

Servicers can’t cancel an active Home Affordable trial modification scheduled to expire before Jan. 31 for any reason other than property eligibility requirements, according to a posting today on a government Web site. They must write to borrowers to inform them about missed payments or needed documents, and give them at least 30 more days to submit them.”

So that in itself must have set off a rash of cancelations.  You have the holiday, plus the extension, plus banks ignoring non-payers.  You can understand why the shadow inventory numbers are off the charts yet looking at standard data paints a deceiving picture.  Part of this was spurred by the horrible numbers released by the HAMP initiative:

Of the number of active trial modifications (that now go out to five months instead of three) only 31,000 have been converted to permanent modifications out of nearly 700,000.  In other words, about 4 percent seem to be entering into permanent modification status which is an abysmal number.  Right now Los Angeles County has nearly 100,000 homes in the shadows if we include the MLS and all other shadow inventory.  Just looking at the MLS we get approximately 19,000+ homes:

What is interesting that homes scheduled for auction between September and today, we find a large number cancelations:

Of homes scheduled for auction between September and today in L.A. County we have seen nearly 10,000 cancelations.  This of course is due to HAMP and the above mentioned moratoriums.  I really doubt that we’ve managed to “save” 10,000 homes in this time but what is more likely to have happened is delaying the inevitable foreclosure or bailout.  You can understand why the public is confused with all this information.  I’m having to pull data from multiple sources and putting it all back together.  What we find when we put it all together is this:

-MLS public view data is artificially low

-Many cancellations only mean that foreclosures have been delayed or put into HAMP which is showing a horrible success rate

-A large number of properties with non-payers don’t even have a notice of default but show up in 90+ days late internal bank data (this number in California is over 10 percent of all mortgages)

-In California 1 out of every 3 mortgages is underwater

And this brings us to probably the more nefarious connection of the foreclosure dots.  Why over the holiday did the government implicitly back Fannie Mae and Freddie Mac with unlimited support?  From the FHFA report released on January 8^th:

“Washington, DC – The Federal Housing Finance Agency today released its third quarter

Foreclosure Prevention & Refinance Report, which shows that as of November 2009, Fannie

Mae and Freddie Mac (the Enterprises), implemented more than 405,000 trial and permanent

loan modifications under the Administration’s Home Affordable Modification Program

(HAMP) and refinanced 4 million loans. The report, which now includes data on

delinquencies, loan modifications and refinance activity for each Enterprise, details the actions

Fannie Mae and Freddie Mac have taken to prevent foreclosures and keep people in their

homes.”

Wait, did you catch that?  405,000 HAMP trial modifications are with Fannie Mae and Freddie Mac loans.  Look up at the HAMP data released by the U.S. Treasury above.  In other words, this is what is happening:

You see where I’m going with this.  The bulk of the nearly 700,000 HAMP mods are backed by Fannie Mae and Freddie Mac.  Since we own Fannie Mae and Freddie Mac, that means we own most of these loans now.  And how are those loans doing?

In fact, of all enterprise loans the distress rate is 7.6 percent (the above chart doesn’t include bank owned homes).  So what is really going on them?  Why uncap the support to these agencies if they are dealing with more and more costly loans?  One idea is with the ultimate underwater bailout.  I ran the quick numbers here:

Recent data shows that nationwide, the average amount for the underwater homeowner is nearly $70,000 (much larger in California thanks to Alt-A and option ARM products).  First American CoreLogic in their latest report had 10.7 million homes underwater.  So to bring homes to basically zero equity, it would cost the government some $745 billion!  Is this where the government and crony bankers are heading?  I have no idea but why else would you uncap Fannie and Freddie and also allow the FHA to keep on making loans while the entire portfolio still shows signs of weakness.  Why?  Because these are the only products in town.  Corporate welfare banks don’t dare touch the American consumer but are more than quick to take bailouts and make government backed loans.  They will push the limit to whatever the government allows them to do and right now it is allowing them to continue the toxic mortgage game.

So it would take basically TARP II only to extinguish the current negative equity.  And who would get this money?  With HAMP, it has been a triumphant failure because it only seeks to protect the banks.  The other option would be to erase this negative equity but the vast majority of Americans are not in this spot and this would politically not fly (as it shouldn’t).  Banks should fail (did we agree to not let banks fail or is this something the crony bankers, Fed, and U.S. Treasury decided to do?).  Current mortgage pricing is completely delusional of the risk involved.  The global markets nearly imploded because of toxic loans and right now 30 year fixed mortgages go for 5.75 percent?  Really?  The only reason this is happening because of the toxic Federal Reserve and horrible U.S. Treasury policies.  The recent AIG e-mails show who the U.S. Treasury is really working for.

Where does this  go?  Who really knows but anyone telling you things are good are in some form of delusion.  And I’m sure the 85,000 jobs lost last month was also a good sign (actually the labor force declined by over 600,000).  This data should shine some light on what is going on but should also show you how flawed the entire system has gotten.

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One of the stunning points found was that 93 percent of option ARM borrowers decided to go with the negative amortization option otherwise known as the “minimum payment” option.  This is something we have established from many fronts and data sets.  The bottom line is the vast majority went with negative amortization and this grew the actual balance owed.  Yet one of the new findings in the report was that 78 percent of all outstanding option ARMs have yet to hit major recast points.  Given that 58 percent of option ARMs are here in California, this is a one state wrecking ball:

In total, some 350,000 option ARMs are still active nationwide.  Over 200,000 of these loans are here in California.  The most risky option as we have established with option ARMs is the negative amortization payment:

Now why was this payment such a poor choice?  Well as the California housing market fell by 50 percent from its peak, the actual balance on many option ARMs was going up.  So not only is the home underwater from the initial starting point, the loan taken out on the home has increased on 90+ percent of these borrowers.  This is like negative equity squared.  So deep are these loans in negative equity territory that not even HAMP can save them.  Oh, and speaking of HAMP, it is turning out to be a colossal failure as expected:

“(NY Times) Capitol Hill aides in regular contact with senior Treasury officials say a consensus has emerged inside the department that the program has proved inadequate, necessitating a new approach. But discussions have yet to reach the point of mapping out new options, the aides say.

“People who work on this on a day-to-day basis are vested enough in it that they think there’s a need to do a course correction rather than a wholesale rethink,” said a Senate Democratic aide, who spoke on the condition he not be named for fear of angering the administration. “But at senior levels, where people are looking at this and thinking ‘Good God,’ there’s a sense that we need to think about doing something more.”

I know many delusional folks in California were thinking that somehow the quiet on the option ARM front had to do with the masterful success of HAMP.  Of course, these loans never qualified for HAMP but that is beside the point.  HAMP is failing because of a simple reason.  Negative equity.  Here in California, we have millions underwater.  Those with option ARMs are not only underwater, they are going to have massive spikes in their monthly payments at a time when the California unemployment rate is the highest in record keeping history.  The problem is Wall Street has sucked up all the taxpayer bailouts and for what?  To keep the crony welfare investment banks ticking?  Trillions of dollars out the door and the real economy is still troubled.  HAMP had the naïve premise that the only problem was high interest rates and the problem with the housing market was toxic mortgages.  Well, the actual problem is thousands of homes are still valued at bubble prices and with stagnant wages for a decade, people can’t afford homes without going massively into debt.  Prime, near prime, and subprime means little when you have no income and that is why even prime defaults are spiking.  The option ARM had such an allure for the gold rush California home speculator because it sidestepped that tiny little caveat of income.  It allowed maximum leverage without the valid income support.  80 percent of option ARMs went stated income.  In other words, people made crap up like saying they made $200,000 when they were pulling $75,000 to qualify for that $600,000 home:

“(CNN) There is another little problem that many option-ARM borrowers seeking refinancing would face: “Upwards of 80% of were stated-income loans,” said Westerback.

These are the so-called “liar loans” in which lenders did not verify that borrowers earned as much money as they said they did. Lenders may not be able to modify mortgages because many of the borrowers’ income could not stand up to the scrutiny. Borrowers may also not want to go through underwriting again because they could be held legally liable for deliberate inaccuracies on their original applications.

Add to those conditions the still fragile economy and high unemployment rates, and you have a recipe for disaster.”

As people chime in about stabilization, California is still hovering near the bottom in terms of prices.  The only reason we have seen prices move slightly up is because the massive jump into foreclosed homes, the home buyer tax credit, Fed buying securities to lower mortgage rates, and all these phony moratoriums that we are now seeing are basically delaying reality for many.  Inventory is artificially low because of the shadow inventory.

People ask for a solution.  Here it is:  We should have (and still should) break up the banks into pieces that are small enough to fail.  Bring back Glass-Steagall with some teeth.  Commercial and investment banking should be put into silos that don’t even come close to one another.  Banks that need to fail should.  After all, the government now backs 90+ percent of all mortgages so why do we even need them?  A quick assessment should have been made from day one on housing.  Those that couldn’t afford their homes should have gotten assistance into rentals.  Here’s a thought.  Why didn’t we create a program where those who had no way of paying on an overpriced home were given a tax break to rent a place in an empty commercial real estate development?  Right there you kill two birds with one stone.  Of course, those on Wall Street and those in our government are two sides of the same coin.  For the past three decades they have systematically neutered our government to the point of it being a bread and circus spectacle.

You think the 200,000 option ARM borrowers in California are sitting in a good spot?  Let us look at negative equity rates for a few metro areas since this is the largest predictor of future foreclosures:

If you look at the Inland Empire and the Phoenix metro area, they virtually reflect one another.  In fact, both areas have negative equity rates of 54% of all mortgage holders.  This is incredible.  Half of all borrowers are underwater in these big regions.  But look at the largest block of mortgages in California clustered in the Los Angeles-Long Beach area.  1.5 million mortgages and 400,000+ are underwater.  You think this is going to bode well for home prices as option ARMs hit their recast dates in stride from 2010 to 2012?  I put in a more normal area of Dallas above and you can see what a normal market looks like.  Even there, you can see that negative equity is still an issue.  But compare that to California and it is another story completely.  What does this mean?  The middle market is certainly going to take major hits once these loans hit their recast dates.  If they don’t qualify for HAMP, then what?  S&P in their report gives an example of a hypothetical $400,000 mortgage:

The payment flat out doubles at the recast date.  Do you think people are going to be able to come up with an extra $1,200 per month with no problems?  You know what the typical mortgage payment for a home bought last month in California totaled?  $1,097.  That is the price of the hypothetical increase in the priciest state in the U.S.  So yes sales are happening but at a much lower end.  How is this going to help those in negative equity on more expensive homes?  Take a look at the raw numbers for the state:

34 percent of all California mortgages are underwater.  You can rest assured that 80+ percent of those option ARMs are underwater.  As the above highlights, those mortgages are still here and they are still toxic.

Option ARMs fall under a bigger umbrella of Alt-A loans.  California has over 700,000 active Alt-A loans.  The bulk of the 200,000+ California option ARMs fall under this category.  But the bulk of these loans are also toxic mortgage waste.  These will go off as well.  These are actually part of the shadow inventory including those who simply stop paying but banks sit back and do absolutely nothing.  Is that really a solution?  Take a look at where the Alt-A loans are in California:

Los Angeles and Orange counties hold the biggest number of Alt-A and option ARM loans.  Do you really think this is a bottom?  It might be for a home in the Inland Empire selling for $100,000 or $150,000 depending on local area dynamics.  But many cities in Los Angeles and Orange County are vastly overpriced.  The above dynamics look similar to how subprime was building up in 2006 and 2007 before the market imploded.  Yet somehow things are now different.

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First let us look at this trend on a chart:

Source: Data Quick

The first key point is that 2009 saw more notice of defaults sent out than in 2008.  In terms of housing distress, 2009 was a tougher market than in 2008.  Sales have boomed but this is mostly due to the lower end of the market enticing investors and first time buyers.  Throw in every incentive you can imagine and you can understand why it “feels” better.  The data as you can see above shows otherwise.  The Q4 data is an estimate but I lowered the number even below the current average.  Given that many lenders are not even moving on some properties, we can expect NODs to probably fall again in Q4.  Some lenders like Bank of America have stated that they will start moving and foreclosing on loans that don’t qualify for HAMP soon but we’ll see.  I take what the banks say with a grain of salt.

You would expect that with a high NOD and weak cure rate, that actual foreclosures would be higher this year for California.  Not the case:

This is a fascinating trend.  A loan that enters the NOD phase in all likelihood is going to be foreclosed.  But banks aren’t moving through the process in full form.  In many cases this is where the shadow inventory is being built.  At this point, it isn’t the REOs on the books that are a problem but loans that are sitting in a sort of mortgage purgatory.  Not paying but also no NOD.  Given low cure rates and the abundance of toxic mortgages in California it is a major red flag that NODs are at a record but foreclosures are falling.  We now know the average foreclosure timeline is 18 months to 2 years so some of these will become foreclosures in 2010.

If we look at quarterly data, you can actually see this.  NODs will spike followed by a jump in actual foreclosures:

You’ll see NODs spike in 2006 and 2007 followed by actual foreclosures.  We see a dip in 2008 because of moratoriums but the trend emerges with one caveat.  Foreclosures don’t seem to have a trend but move sideways.  So what is the reason for this?  Banks are largely operating with no system in place and many institutions are selectively ignoring certain non-payers.  So in terms of actual data, they look fine in some areas.  After all, if the bank isn’t pursuing the property why would the public care?  The public should care because taxpayers now subsidize the entire banking and mortgage industry (hello FHA insured loans).

Many of our favorite toxic mortgage all-stars appear in Q3 of 2009.  In fact, the largest defaulter in Q3 is now defunct Countrywide:

In fact, out of the top 5 culprits only two stand in 2009 and that is Bank of America and Wells Fargo.  Bank of America swallowed up Countrywide Financial and Washington Mutual is now part of Chase (as if I need to tell anyone in California with Chase’s massive marketing blitz partly subsidized by the American taxpayer).  The lenders are gone but the loans are still here wrecking havoc.

Yet that is only half of the story.  If we look at some of the subprime outfits we get default rates for the period of:

ResMAE Mortgage:         73.9

Ownit Mortgage:             69.5

BNC Mortgage:                 61.4

Argent Mortgage:            59.9

First Franklin:                    59.4

These suckers are long gone but here are their mortgages clogging up the California housing market.  Is anyone going after these people criminally?  Look at those rates!  You have fraud factory written all over them.

Nationwide Housing Market

The nationwide housing market is still in deep trouble.  The amount of single family homes in delinquency is an all time high:

Source:  Congressional Oversight Panel

Now here is where the above California data doesn’t coincide.  California has 5.3 million homes with a mortgage.  Keep in mind California is in much worse shape than the overall trend.  So using this data, you would expect some 530,000 homes in a form of distress.  That nearly matches up with the 475,000 figure for NODs.  But then, if we look at actual cure rates, we are left asking what is really going on here?

Most of the Alt-A loans and a ton of subprime is here in California.  Meaning, of the 475,000 NODs we would expect only 23,750 to cure (assuming better nationwide stats).  Yet actual foreclosures are trending more in the figure of 230,000 for 2009.  In other words even by this data some 200,000 homes are sitting in the California pipeline.  The number is much higher because we are not looking at many homes with non-payers or strategic defaulters that have yet to even receive an NOD.  Can’t track something you don’t report but we know it is happening.

We have never had so many housing units in foreclosure:

This is the trend that we should be following.  So far, we have seen no major decline in actual foreclosures.  Negative equity is a big reason for the defaults and California is one of the prime negative equity states:

Source:  Congressional Oversight Panel

30 percent of California homes with a mortgage are underwater (equals 1.745 million home owners/debtors).  35 percent are near negative equity.  That is why pushing the 3.5 percent down with FHA loans is such a losing proposition.  If homes decline say another 5 or 10 percent, there goes another batch of people into negative equity positions which increase the chance of foreclosure.  The data is right here but gimmicks trump good public policy.  Nationwide 20 percent of mortgages are underwater.  Not good.

I’ve been searching for a chart that measured the overall foreclosure rate with unemployment for some time now.  It would reason that higher unemployment would lead to more foreclosures.  Yet that isn’t always the case:

You’ll notice in the early 1990s recession that as unemployment went up, foreclosures merely moved sideways.  In the early 1980s, unemployment shot sky high yet foreclosures modestly increase.  But during this decade, housing and employment coupled.  Why?  Our entire economy became dependent on the housing bubble.  What this meant was that wherever housing went, unemployment was sure to follow.  Now, foreclosures are busting through any historical trends.

The Congressional Oversight Panel also doesn’t believe in the hype of another housing bubble:

If anything, the futures market doesn’t see any price increase well into 2013.  So much for the housing shills pumping up the current market.  They fail to see that the recent price increase is based on:

-Moratoriums

-First time home buyers

-Investors

-$8,000 tax credit

-Fed buying $1.25 trillion in GSE MBS keeping rates artificially low

These things can’t go on forever.  Those betting with actual money in the markets don’t believe this either.  Why?  Employment is still weak.  We have a glut of housing to last us through 2013.  That is why you don’t see massive home building even 2 years after the bubble burst.

We also have an artificial amount of inventory on the market with government programs:

As I discussed before, the HAMP is largely a misguided program because it is based on the extend and pretend philosophy.  So far, only 1,711 modifications have been permanent through HAMP.  But you’ll love this data.  Remember that HOPE program?

Bwahahahaha!  94 refinanced loans since the program launched in 2008!  I remember talking about this back in 2007 when it was pre-launch.  It turned out to be a bigger joke than even I could have imagined.

Even when we drill down in the 1,711 HAMP perm-mods, you will notice that the loans are largely fixed rate products:

So much for redoing those Alt-A and option ARMs here in California.  By the way, good luck on getting a 31 percent ratio on some of these homes in mid to upper tier SoCal areas.  These homes are underwater to the point of needing a scuba diving suit to refinance the mortgage.  Plus, most people will strategically default on these places anyways.  Banks on the other hand, will probably prolong the foreclosure process as long as they are sucking taxpayers dry.

What were reasons given from the HAMP modifications?

The top 3 reasons include, loss of income, excessive obligations, and unemployment.  Basically the job market!  You will not solve housing without having a solid employment base.  Some people have asked me why doesn’t Wall Street and the government see this?  They do.  They just don’t care.  Their assumption is that if Wall Street is raining, somehow some little drops will sprinkle on the poor typical American.  Ask the 27 million unemployed and underemployed how happy they are that the S&P 500 is now up 62 percent from the March low.  Lagging indicator?  To the point of lagging you out of a decade.

And let us look at the data of what is being done.  This is the actual ruse of the HAMP mods.  It is extend…

And pretend…

The loan rate is only low for a fixed time.  The principal is fully intact allowing banks to claim these loans at full face value which is a crock.  Without the HAMP government subsidy, these loans would need to be foreclosed.  I have no problem working with homeowners only if the banks fit the bill.  Yet they are so corrupt and cynical that they want the money for the mods to come from the government!  Bail us out and then pay for the mods.  What a load of insanity.  Seriously?  Enough of this and let the trials begin.  It looks like a couple of hedge fund gurus are being taken down with more to follow.  I’ve sent letters to Congress, called up representatives, and some agree but the sense I got from many is “what can I do?.”

Also looking at the extend and pretend, you can’t modify property taxes and insurance. These are based on the assessed value of the home which according to the bank is still up in the peak ranges.  What horrible policy.

The OCC and OTS have some more data in other types of modifications:

The same kind of pattern emerges as the 1,711 HAMP mods.  That is, extend the term and pretend to lower the rate for a few years.  You can also capitalize some of the principal on the back end rendering many of these option ARM-lites.  That is why the re-default rates are through the roof.  I imagine the HAMP re-default rates will be equally high.  You saw the reason for payment problems.  You didn’t see, “because my payment was too high” but more employment based.  For those that saw reductions in their income, what if they lose their job?  This is basically underwriting ala 2005 again.

People ask then what is really the solution?  I’ve said it many times but you can’t have an economy without job growth.  This sounds obvious but it would appear to be off the radar for Wall Street and our government.  If you focus on the job situation, then housing will right itself.  Notice that 1991 recession and foreclosures?  What happened?  Well we had the technology boom and added 20 million jobs over the decade.  That was a bubble and that burst but you can see that yes, you can have an economy that runs outside of housing.  But this decade housing was the economy.  And the government and Wall Street basically want that industry back.  Well it isn’t coming back.  They need to figure out what to do.

And there is nothing wrong with renting!  In fact, it is a shame that there is no actual initiative encouraging renting.  Some of these people in distress will do much better to downsize.  They are even telling the HAMP mod survey that they are financially strained.  Maybe renting  a lower priced home will help.  Nothing wrong with that until you land on your feet again.  Yet this notion that everyone deserves to own a home is largely a reason we are in this mess.  Wall Street exploited this “American” desire and people ate it up.  In fact, the dream was no longer to own a modest home but to own some oversized McMansion and drive a gigantic V-10 tank that got 8 miles per gallon.  When did the American Dream become a Marvel Comic?

Some suggestions are to bring back our industrial base to the U.S.  Make ourselves more competitive.  Flipping homes to one another while quant jocks play Halo on one screen and do billion dollar trades on another Bloomberg Terminal is not a real economy.  It basically strips the value out of the real economy.  These banks posting record profits?  JP Morgan making $3.6 billion last quarter.  Really?  Most of it was through their i-banking and private equity division.  If they want to act like a hedge fund so be it but they have zero access to the Fed and U.S. Treasury.  Instead, they are a primary dealer.

Healthcare is a big part of our economy and will remain that way with over 70 million baby boomers entering retirement age.  Surely we can create some jobs in this arena.  At least it is better than installing granite countertops in every home and adding Jacuzzis and pretending we are keeping up with technological innovations of other countries.  In large part, housing has become a major distraction.  It is a cultural neurosis like Tulip Mania or watching UFOs on TV taking away a kid but in the end, it is all fake.  The equity in these California homes was fake.  The Wall Street profits were a sham.  So until we can return to a real economy, focusing on housing only serves as a form of therapy.

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Source: BLS, EDD

I’ve compiled the U-6 rate for the state and it is over 23 percent.  That is why most people either know of someone that has been let go, has seen their hours cut back, or is one of the over 2 million unemployed in the state.  With the state hiking taxes, this impact has been felt by all.  Yet California isn’t alone.  Many other states have seen their tax revenues decline.  Unlike the federal government with access to the U.S. Treasury and Federal Reserve printing presses, most states have balanced budget requirements.  A recent study shows the massive decline in state tax revenue:

Source:  Rockefeller Institute of Government

The reason overall state taxes are falling much harder and faster than local taxes is many states take in a big chunk of money from personal income and sales taxes.  California in fact brings in over 50 percent of their revenue from personal income tax.  In recessions, the amount collected falls.  Combine this with another fluctuating revenue source like sales tax that also declines in recessions and you can understand why the state has had to deal with $60 billion in budget gaps.  We are already expecting a budget deficit of $5 to $8 billion depending on what analysis we look at.

Local taxes have faired better simply because of more stable income streams.  But even this hasn’t protected them completely.  Here in California the state has gone to battle with local municipalities in terms of paying on obligations.  This is not the way to handle major budget deficits.

For the second quarter of 2009, state tax revenues across all states saw a 16.6 percent revenue decline.  This is the largest decline on record dating back to the early 1960s.  This is not a typical recession.  This is the deepest protraction since the Great Depression.  This only adds fuel and a reason to be cautious and suspect of the California housing rebound.  The state is going to be left with two options to balance future deficits.  Either raise taxes further or cut spending (more job layoffs).  Both cases do not bode well for housing.

Let us now shift gears to the Home Affordable Mortgage Program (HAMP).  Much is now being made about the “success” of the HAMP program with nearly 500,000 mortgages now in the trial modification period.  We have major reasons to doubt this premature success.  Let us go into detail why the HAMP program is largely a smoke and mirrors exercise in trying to stem foreclosures.

Let us Smoke some HAMP

On the surface the HAMP seems like a good initiative.  Let us try to keep borrowers in distress in their homes.  After all, a major reason for our current problems are due to housing so why not work with borrowers?  Yet the problem is in the way the program is structured.  The way HAMP has been carried out is largely a big extend and pretend program.  In fact, HAMP is another reason adding to shadow inventory.  Instead of going to another source for data, let us go directly to the HAMP website and get some documents:

Source:  HAMP

I always took issue how the program was structured.  The essence of the program is the belief that the problem is the interest rate and terms of the mortgage.  Yet the real issue is something we all know.  The banking industry is the main culprit in setting up this housing bubble and gave loans to people it shouldn’t have.  Wall Street and banks made billions in profits and when things went bad, they took the taxpayer for trillions.  HAMP is actually designed to help the banks, not the borrower.
Look at the guidelines from the site above.  First, the borrower needs to be delinquent or face imminent risk of default.  That is easy to establish.  So what is the solution?  Look at the three steps given to us above.  Drop rates to as low as 2% and if necessary, extend the term of the note to 40 years.  They even give us the option of capitalizing principal to the note.  In other words, these are option ARM-lites.  This is straight from the program’s site.  We are even given a document that resembles option ARM terms:

This is provided to us as a sample modification agreement boilerplate.  Let us go back to those 500,000 trial modifications.  Keep in mind these are trials, the program is too early to show whether this is permanent.  JP Morgan announced a $3.6 billion profit last week based on their investment banking and private equity divisions.  Losses are still growing in their mortgage holdings and also with their credit cards.  In other words, JP Morgan is basically using taxpayer money to play the stock market casino.  Forget about traditional commercial banking profits.  It is now operating like an investment bank.

It is important to look at JP Morgan because they swallowed up toxic mortgage All-Star Washington Mutual who by the way, made billions in toxic option ARMs here in California.  JP Morgan by sheer size has entered into the most HAMP trials by any bank in the country:

This data goes up to the end of September.  So 3 million mortgages are estimated to be eligible for HAMP and nearly 500,000 are now in the trial phase.  Keep in mind 757,955 offers were sent out.  Another brainy move by the U.S. Treasury was allowing servicers to use stated income in allowing for the trial program.  That is correct, the same style underwriting for Alt-A and option ARMs is being allowed for entrance into the trial period.

Initially the trial period went for 3 months but is now up to 5 months.  I am not making this up:

The announcement of 5 months was recent so it may not show up in some of these boilerplate documents.  So what does this mean?  We will know success in mid to late Q4 or early 2010.  Most of the trial modifications have occurred in the last few months:

So I would imagine that once we move from trial to permanent, many of these will re-default or will not qualify.  To move from trial to full mod there is a requirement to vet income.  Why not do that now?  Good question.  It is always good to put quick gimmicks in front of good public policy.  A good example of horrible public policy is the $8,000 tax credit.  A waste of time brought on by the lobbying arm of the housing industry and politicians with no backbone.

There is also interesting data out on the first trial modifications.  Look at the chart above again.  50,130 trial modification were entered into in May of 2009.  Even with the 5 month extension, we can now see how many entered the full modification phase.  How many went into a permanent modification?  1,711 or roughly 3 percent.  Some interesting data on this:

“(HuffPo) Here’s why: Permanent modifications under Obama’s Home Affordable Modification Program (HAMP) first go through a three-month trial period. Since the COP and Ocwen figures are as of Sept. 1, that means that those permanent modifications entered the trial phase back in April and May. As of the end of May, 50,130 borrowers were in trial plans (there are now 500,000). The low number of permanent modifications is partly due to the fact that “the initial volume of HAMP trial modifications was quite low,” the COP noted in its report.

Even at this preliminary stage, the low number of permanent modifications is still shockingly low. Warren’s panel said it is “concerned about the low rate of conversion from trial to permanent modifications.” Unless the rate increases “substantially… HAMP will come nowhere close to keeping up with foreclosures.”

The panel’s report discusses possible reasons behind the low conversion rate, including data reporting issues and the failure of borrowers to comply with the program, like making timely payments. One issue stands out: “the difficulties servicers have in assembling completed documentation on modifications commenced on a ‘verbal’ or ‘no-doc’ basis.”

Yes, not making a payment would somehow be a problem.  So let us assume a rate that is nearly twice (5%) that of the early trial modifications dating back to May.  This would mean that out of the 500,000 trial modifications some 25,000 mortgages will be helped!  $75 billion to help 25,000 mortgages?  This is insane!  This is like the $40,000 per house that taxpayers ended up footing because of the $8,000 tax credit.  In fact, let us be generous here.  Let us assume all the 3 million loans in the target range get a trial modification and 5 percent go into the permanent phase at the higher rate.  We are talking about 150,000 mortgages.  So do the math:

$75 billion / 25,000      =          $3,000,000 / for each fix

$75 billion / 150,000    =          $500,000   / for each fix

Dr. HB back of the napkin solution

$75 billion / 500,000 =             $150,000 / for each fix

This is nuts.  I even ran a back of the napkin scenario that does better.  It is simple.  The median home price in the U.S. is $170,000.  How about we pick all loans that fall under this number, see if they are delinquent, and then flat out pay off 500,000 of these mortgages via a lottery system.  I’m not even sure where all this money is going.  If we only have 1,711 loan mods and basically all they are doing is lowering the interest rate and extending the terms, something has to give.  Oh yes my friends!  It is another crony handout to the banks.  Let us look at some documentation provided to banks/investors to entice them to enter this program:

What an absolute waste to basically extend and pretend.  Keep in mind that principal reduction is basically absent in any of these loan modifications.  Yet right off the bat, even when a borrower can “make things up” to enter the trial period the servicer is paid!  Paid for what?  We already know the current success rate is only 3 percent.  Are we to expect a sudden jump over the months?  Even at 10 percent we are wasting money at the front end.  We would have better success just doing a lottery of delinquent loans and paying off 500,000.  I assure you we are not going to have 500,000 permanent loan mods given these current measures unless something drastically changes.  Also, you can modify all you want but unless we start seeing some job growth, what are people going to pay their mortgage with?

Now keep in mind I’m not advocating for the lottery option.  This is an extreme example to show where the money is being wasted.  But also, big banks love this.  Why?  Because these loans are still held on the books at full face value.  That is right, banks can extend and pretend and buy some time, another 5 months by simply extending the trial period to a large number of loans – they don’t even have to check for income.  Think that JP Morgan profit would be so huge if it had to deal with those 437,000 mortgages that are 60+ days late?  You can bet that with WaMu and California lending, they probably have a ton of $500,000+ mortgages that are going to go bad when the option ARMs recast next year.

Either way, HAMP is simply another handout to banks.  So far we only have 1,711 permanent modifications.  Banks are laughing at Washington D.C.  They did with the last administration and the current one.  Why not just go in and claw back those profits and clean house?  Why not tax bonuses on Wall Street up to 90 percent?  After all, they should be thankful because they would be gone without the taxpayer.  And who really knows if the loan mods won’t re-default since we don’t have that data.  But data from the OCC and OTS shows re-default rates of 50, 60, or even 70 percent depending on the loan category.  Even if all these mods go permanent, all you are doing is extending the problem.  The rate eventually will go up.  But they are betting on what, another housing bubble?

Policy has gotten so bad that we might as well do a lottery.  Seriously.  A random Vegas style lottery would have better results.  What a joke.  Banks are controlling this country and policy.  HAMP is $75 billion in the scheme of trillion dollar bailouts but the amount of loans that are now being shelved for another 5 months is a lot larger.  In other words, it is another way for banks to hide losses.

After seeing things like this you might need to role one and smoke some HAMP.

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